Mix Masters

Jan 20, 2005(Date Posted)

By Rachel Zoberman     

After a grueling day at the office, a resident stops on the ground floor of his apartment building to buy a sandwich, pick up his dry cleaning and rent a DVD. Ah, life is good. But soon, his quiet night at home is interrupted by the smell of restaurant cooking, the sound of trash being tossed in the dumpster and a glare of street lamps from the main avenue below, a flood of light that regularly keeps him up at night.

    These small details, such as the placement of lights and exhaust fans, may seem trivial when designing a mixed-use community. But developing this popular project type is anything but easy, and simple logistical errors can easily lead to this unfortunate scenario.

    "It's not just a matter of having a retail store and plopping residential on top, " says Cliff Goldstein, senior partner at Los Angeles-based J.H. Snyder Co., a real estate developer. Merging residential, retail and even more office space within one site is challenging and takes months of planning and coordination.

    Nevertheless, the potential clients are not stopping developers. Mixed-use projects are sweeping the nation, and for good reason: The product type makes sense for all parties. The typical urban model-residential over commercial space-helps both retail and housing developers combat soaring land prices, gives residents the convenient lifestyle they crave, and helps cities revitalize blighted areas.

    Much to the dismay of many developers, there isn't a set formula to create the perfect mixed-use project. Each location is unique and requires its own set of plans. "Unlike a garden [apartment] experience where you take it down the road and build it again, these deals are one-off deals, " says Chip Bay, senior managing director of Trammell Crow Residential's Mid Atlantic region. "Once you figure out what you are doing and build it, your going to take those plans and you're probably going to throw them away. You'll never use them again."

FINANCING

Dig for Gold

    Although the urban missed-use concept has been gaining popularity and prominence, the financial markets are still hesitant to enter this arena. "Their under-writing standards that they have always used don't match up well when they look at a mixed-use project, "says Goldstein of J.H. Snyder Co.

    As more mixed-use pops up, however, lenders are slowly becoming comfortable with he product type, which works in cities, suburbs and highly urbanized suburbs. Plus retailers and service providers, who once avoided the city, have a heightened interest in bringing this concept to new markets. "As that happens, that will open up more financial alternatives for developers," say Brian Tracey, community development banking executive for Bank of America's Atlantic region. "So developers shouldn't overlook a city market because they think, 'Well, if I go into that neighborhood, I can't attract capital.'"

    A big obstacle for developers is obtaining sources of permanent, or take-out, financing, Tracey says. Many lenders, such as Fannie Mae, have a cap on non-housing income, which narrows the permanent financing sources for developers working on a project where, for example, 30 percent or 40 percent of the revenue is coming from non-housing income. One way around this is to subdivide the property into two separate legal entities, where the retail portion is financed separately from the housing with two loans.

    This subdivision works best on a large project, as the legal fees don't pay off on a smaller project, says Tracey. A prime example: Center Point, A mixed-use project in Baltimore being developed by Bank of America's Community Development Corp. and Harold A. Dawson Co., an Atlanta-based developer. The project, which encompasses a full city block, includes 392 apartments, 35,000 square feet of retail, and 400 parking spaces. "We are financing it in different components to meet with various criteria for take-out sources have located," says Tracey.

    Most important, mixed-use experts say, developers should ensure they explore all financing options. Historic tax credits play a big role in the many urban markets but are often overlooked, especially by smaller developers, Tracey says. Historic tax credits provide a financial cushion, which can help developers get the right tenant mix because they don't have to go with he first offer they get. Owners of certifiable historic structures or buildings on the National Register of Historic Places are eligible to apply for historic tax credits.

    Another option is new-market tax credits, a relatively new Treasury Department program designed to encourage commercial development in low- and moderate- income census tracts. While these credits are not available to developers who will derive a sizable component of income from a project's housing components, the program is a good fit for projects with a large portion of  retail that is financed separately from the housing segment, Tracey says. Bank of America's Center Point is being structured and developed to qualify for new-market tax credits.

CORPORATE STRUCTURE

Building a Team

Now comes another big question: Should a housing developer intrigued by mixed-use fly solo or partner with a retail developer?The projects size often dictates the answer.

    For a smaller project, such as one with 7,500 square feet of retail, Long Beach, Calif,-based Urban Pacific Builders typically develops the project itself. But for a large project the urban housing development forms a joint venture with a retail developer. Such is the case at Brookhurst Triangle in Garden Grove, Calif., which will include 88,000 square feet of retail and 510 for-sale residential units when it opens in 2006.

    "Because we are not retail developers we will bring a partner," says Scott Choppin, Urban Pacific's managing partner. "They stand shoulder to shoulder with us, providing up-front capital to do the predevelopment of the project, and they will get the retail."

    Since Atlanta-based Trammell Crow knows its expertise is housing, not retail, the company focuses on finding sites that are adjacent to or near shopping areas, says Bay. In Rockville, Md., the company plans to build 230 high-rise condos in a parking adjacent to a retail center with a Starbucks, Barnes and Noble, and Giant grocery store.

    "We are just doing the residential component, but our residents will get all the benefits of being there in a retail location," says Bay. "So it's really the best of both worlds. All I got to worry about it my area of expertise, which is residential."

STAGING

Connect the Pieces

Building a mixed-use project is a lot like solving a Rubik's cube: You've got to make sure all the components match up. "Our experience with this type of product-the high-density mixed-use-is that you can not plan enough," says Bay. "There are a lot of challenges form the construction side, a lot of coordination issues."

    Because each mixed-use project is unique and there's no model to follow, it's essential to build the project on paper all the way through before beginning the construction, Bay says. "The more [thought] that goes into building the project ... the better off you are going to be once you start construction."

    The actual order of construction varies by project, but the residential and housing portions usually are built simultaneously, says Bay. Opening the retail portion first can help generate excitement for the apartments, but it's not always an option: it can be difficult to get temporary certificates of occupancy in the retail space if the entire building is not completed, and lifesaving systems, such as fire alarms and defibillators, must be in place before you can open the doors to shoppers, says John Ausburn, vice president of development for Pacific Properties, a Las Vegas-based real estate developer.

    Parking can pose the greatest challenge for a developer, as you must accommodate both residents and shoppers. "Parking is a hugh issue," Ausburn says. "You almost have to start with parking."

    That strategy worked in Dallas at West Village, a large mixed-use project Ausburn helped develop when he was at Dallas-based Phoenix Property Co. The development team spent the first two months planning the parking. The winning solution: interior street parking for shoppers, separated by gated areas. Of course, there's always the problem of residents parking in customer spots, especially the convenient street spaces. It's crucial for apartment managers to register residents' license plates and hand out decal stickers so it's obvious when a resident parks in the wrong spot, says Ausburn.

    Parking isn't the only organizational issue. Other key areas include coordinating trash removal, noise and odor and keeping outdoor lights from shining into units--the kind of details that would irritate a resident. The coordination requires a good deal of thinking, but it's not hard, says Howard Perlman, founder of Henderson, Nev-based Perlman Architects Inc., which specializes in mixed-use design. "The contractors are getting used to it; they're starting to understand how to build the product."

    At the District at Green Valley Ranch, a 410,000-square-foot mixed-use property in Henderson, Nev., restaurants are carefully placed so that the prevailing winds don't permeate residential units with the smell of Chinese and barbeque food. Sound proof windows block out the voices of teenagers running through the streets, and all outdoor light fixtures focus away from the buildings. Perlman Architects designed the community which opened in may 2004.

RETAIL

Create a Buzz

The best mixed-use projects radiate a constant energy and excitement. To create that atmosphere, you've got to have the right retail mix, says Perlman. Plenty of variety is key, especially in larger projects, he adds. "[You need] a lot of restaurants, lounges, bars, movie theatres--anything that is food, fun or entertainment," he says.

    To make the job easier, It's helpful to have a well-known anchor store to demonstrate your project's financial viability and attract other retail tenants, says Ausburn. Gap and Banana Republic anchor West Village. "They allowed us to get financing and they lent the project credibility," he says. These anchor stores were especially crucial because mixed-use is still a fairly new concept in Dallas, he adds.

    Local retailers also are an important component, as they lend a unique flavor to a project. These stores are not always developers' top pick, though, because of financial concerns. "The capital markets are not yet as developed and as accepting of those types of tenants," says Tracey. Still, the concept can work.

    America's community development arm focuses on bringing small businesses to its projects. At Center Point in Baltimore, for example, the company has a locally owned hat shop on board and plans to get other local stores to complement several national retailers.

    Above all, shoppers and residents are looking for activity and excitement. " If you really want to make the mixed-use deal happen, it has to feel like it's active and alive even when it's not prime shopping time," says Perlman. That's not a problem in dense, highly populated areas like New York City. But it can pose a challenge in an area like Henderson, which is about 15 minutes from the Las Vegas strip.

    To jazz up the District at Green Valley Ranch, Perlman added a cruising street-- a main street in the middle of the project--to add vehicular traffic. "The way to fill up space is with cars as movements make it look more realistic." he says. The finishing touch: Large flags tied to lamp-posts and lighted banners, which give the community a New York feel.

    With West Village in Dallas, Ausburn attributes much of its success to the outdoor seating offered by all restaurants and bars. "There's constant activity out on street." he says. "That's real attractive to people." Residents love to look out their windows and people watch, he adds.

RESIDENTIAL

Make a Statement

In the midst of all the planning, don't forget about the design of the housing units themselves. Residents expect something different they are living on top of store, says Perlman. Loft-style units, with high ceilings and hardwood flooring, are a popular option because they create an urban, industrial feel that fits the downtown energy of mixed-use projects. The District features two-story loft unitys.

    On average, the units will be al little smaller than those in a typical apartment building because the developers pay a premium to be at these locations. But residents--often young professionals--tend to eat out a lot and are willing to compromise a bit on size in exchange for the location, says Richard Lamondin, president of Coral Galbles, Fla-based Cornerstone Premier Communities, which is building Hollywood Station, a four-block mixed-use project in Hollywood, Fla.

    Mixed-use projects also attract baby boomers, who are willing to pay more for the lifestyle. "They are looking for convenience, whether it's to get a quick bite to eat, whether it's to get a cup of coffee on the way out the door or whether it's to do their grocery shopping when they get home at the end of the day." Bay says. Just make sure to keep the trash and food odors out of the residents' units.